Public Information Notice No. 97/10

Press Information Notice: IMF Concludes Article IV Consultation with Chad

July 15, 1997

The IMF Executive Board on June 13, 1997 concluded the 1997 Article IV consultation¹ with Chad.

Background

Following the devaluation of the CFA franc in 1994, significant economic progress has been achieved in Chad. Macroeconomic performance has improved markedly with the implementation of economic and financial reforms and enhancement of the policy environment. These reforms included restructuring the domestic tax and customs tariffs agreed upon at the level of the Central African Economic and Customs Union (UDEAC), the abolition of export and import licenses, the privatization or liquidation of seventeen enterprises, the amendment of the labor code, and the liberalization of virtually all prices. Five years of deteriorating economic conditions have yielded to sustained positive output growth. Real GDP rose by some 10 percent in 1994, aided by a good crop season and the return of internal confidence with the improvement in the political situation, and prices surged with the pass-through of the effects of the devaluation. In 1995 growth was sustained at 3.6 percent despite unfavorable weather conditions which constrained agricultural output, and inflation declined to an annual average of 9.5 percent.

In 1996, the overall economic and financial situation of Chad continued to improve, although real GDP growth was only 2.7 percent, because unfavorable weather conditions in the northern region of the country affected severely the production of foodstuffs which dropped by 6 percent. In contrast, the cotton harvest was some 30 percent larger, as compared with the previous crop year, which reflected the strong producer price incentives. The other sectors performed well, with strong growth in the industrial sector (6 percent), and in construction and public works (9 percent). Inflation was higher than expected, as the effect of the drought and temporary bottlenecks in the supply of other goods, notably petroleum products, drove up prices by some 10 percent.

Public finances continue to improve. The current fiscal deficit fell to 2.9 percent of GDP in 1996, down from 3.8 percent of GDP in 1995, and some CFAF 49 billion (US$95 million) of domestic and external arrears, equivalent to 8.1 percent of GDP, were settled with the aid of external assistance, including debt relief. The improvement in the fiscal accounts stems primarily from the satisfactory implementation of the tax and customs reforms, the strengthening of tax administration, and the streamlining of the revenue collection agencies. Revenues rose to some 10 percent of GDP in 1996 from 8.5 percent in 1995. However, weaknesses in budgetary management and expenditure control, led to overruns in expenditure (equivalent to 1 percent of GDP) especially with regard to the wage bill and allocations to the nonpriority sectors, including defense. Strong corrective measures were adopted in the supplementary budget for 1997 to address this problem and to boost revenue collections further.

The external current account deficit (excluding official transfers) narrowed somewhat to 19.4 percent of GDP in 1996, from 20.5 percent of GDP in 1995, despite a deterioration of 4 percent in the terms of trade which limited the growth of exports receipts to 6 percent, mostly from cotton exports; imports rose by some 11 percent, in line with the increase in public and private investment; and private transfers were larger by the equivalent of 1 percent of GDP than in 1995. With a strong capital and financial account, the balance of payments registered a surplus estimated at CFAF 6.7 billion (US$13 million).

For 1997, the IMF staff projects a real GDP growth of 6 percent and an abatement of inflation to some 5 percent; an improvement in public finances with the fiscal current account close to balance, and a further reduction of the external current account deficit. It is expected also that structural reform efforts will focus on the large parastatal enterprises in the cotton, sugar, electricity and water, and telecommunications sectors, on the privatization of the remaining two state-owned commercial banks, and on the restructuring of the civil service.

Executive Board Assessment

Executive Directors welcomed the continued improvement in Chad's overall economic performance since 1995 and the headway made in some structural reform areas, in particular the steady decline in the external current account deficit and the rebound of economic activity in the nonagricultural sectors. At the same time, Directors were disappointed about policy slippages in a number of areas during 1996, particularly the budgetary slippage stemming from expenditure overruns. While welcoming the corrective actions taken, Directors stressed the need to strictly implement the program in the period ahead.

The authorities needed to pursue adjustment efforts vigorously in order to strengthen fiscal discipline and to meet pressing public investment and social needs. That would allow more room for private sector development and set the conditions for sustained economic growth and progress toward external viability.

Directors welcomed the authorities' action to strengthen their fiscal policy stance for 1997 and the supplementary budget introduced in March. They emphasized the critical importance of strict implementation of budgetary procedures to ensure that expenditure mismanagement did not recur and to avoid expenditure overruns in the future. Directors also welcomed the authorities' decision to prohibit expenditure outside normal budgetary channels, as well as the measures taken to increase control on military spending. Further progress with demobilization was also important. Directors were encouraged by the authorities' determination to contain the wage bill through the freeze of nominal wages and the retrenchment of personnel. At the same time, they stressed the need to maintain priority spending on education and health, and to reduce spending for nonpriority sectors in 1997 as budgeted. Directors urged the authorities to strengthen efforts to boost the still low revenue/GDP ratio, particularly by broadening the tax base and improving the collection of petroleum taxes and nontax revenues. They welcomed the authorities' decision to implement by July 1, 1997 the mechanism to control import duty exemptions on government procurement, stressing that rigorous implementation of that mechanism would help enhance revenue collection and reduce fraud and tax avoidance.

While noting that a start had been made with civil service reforms, Directors urged the authorities to accelerate those reforms, while consolidating control over the size of the civil service and the wage bill. They emphasized the need to speed up the reform of the social security system with a view to ensuring its long-term financial viability. Directors urged the authorities to accelerate the privatization operations already in progress. They noted with satisfaction the progress made in the preparation of structural reforms in the cotton, electricity and water sectors, but expressed concern about the delay in the reform of the sugar company. Directors urged the authorities to establish a timetable for a rapid removal of the reference price for sugar imports. Directors noted the need to strengthen the financial system, including through privatization.

Directors observed that Chad's balance of payments outlook was expected to improve in the medium term. They noted that the country's debt-service obligations appeared sustainable, and welcomed the authorities' intention not to mortgage future oil revenues with nonconcessional borrowing.

Directors underscored the need to strengthen efforts to improve Chad's macroeconomic statistics, and noted the need for technical assistance in that area. They urged closer collaboration among all units of government and the central bank to improve the country's statistical base.